Handwringing is actually different from knowing something

Megan McArdle is the business and economics [sic] editor  of the Atlantic. She and I have crossed swords mice before and if she recalls those debates at all probably thinks I have no manners and don’t like her.  As to the first, I do wish I were more gracious in person and in print, and as to the second, I don’t think we’ve ever met and presume she’s a perfectly nice person; she is certainly decent and just.  She has more formal economics training than I have (an actual MBA) and beats me on credentials right off the bat.

Unfortunately, her current column,  on the business prospects and options for digital media requires attention both because (i) the topic is really, really, important and (ii) it’s in a widely read publication, and because rather than shedding the least ray of light, it raises serious questions about her employer’s understanding of the words business and economics.

She records a bunch of anecdotes about how hard it is to make a living generating music, video, or text these days, and a few more about folks who have managed to scrape by in niches, or issuing recordings effectively free but charging for tickets at live events.  She rails that we have become ethically unmoored (stealing content) along with a little potted psychology. But she seems to be completely innocent of the most basic economic ideas that could actually illuminate her topic for an educated reader, and to have read absolutely nothing written by real, um, economists or other experts in this field. There is a large literature in copyright and intellectual property (if you haven’t met Lessig, Fisher, Towse, Scotchmer, and Pam Samuelson you really have a nerve writing about this).

Her theme sentence is “Maybe it’s time to admit that we may never find a way to reconcile consumers who want free entertainment with creators who want to get paid.” Only a stone [deaf] libertarian, who believes market failures are imaginary, could write that sentence and not think, like instantly, “does this sentence make any sense at all if I plug policing, parks, or clean air to breathe into it in place of entertainment?”

OK, let’s do it again: digital content is a non-rival good. If I consume it, there’s no less for you, so its marginal cost on the consumption side is zero. It’s like a spot on the grass in the park, or a (literal) breath of fresh air. The efficient price of anything to consumers is marginal cost, period, end of story, line feed, -30-. This is what people who download music understand: it doesn’t feel like stealing because it doesn’t leave any less for anyone else.

But oh dear and oh gosh, how can we possibly provide something that’s costly to make free to its users – has a civilized society ever done anything so difficult? Um, yes, lots of stuff (cf parks, defense, the Smithsonian museums, streets to walk on, foundation grants, on and on). What I think makes McArdle crash around in the dark bumping into things here is that the mechanism by which we do this is (outrage alert, not safe for work at AEI, faint of heart stop here!) government, sometimes including its distinctively American non-profit arm. If you think government is ab initio a moral outrage and a tool of the devil, you simply should not be writing for pay about digital media (or a lot of other stuff). Market failures are technical properties of certain goods, not ideological choices or figments of an overheated lefty’s imagination. If you don’t understand that, you just have to stay in chapters 1 to 3 of the textbook and stick to guns and butter and stuff that can be put in a burglar’s sack and carried away; you will get a lot of egg on your face and a terrible headache if you get into environment, education, defense, health policy, crime, recordings, and all that ill-behaved stuff.

Machinery to give away music, video and text, but still pay artists and other creators properly (that is, according to the value they create so they get the right signals about what to do more of) is not trivial to design, especially because unlike a park, we don’t want the government making quality judgments about it, nor observing what individuals are consuming.  But it’s not impossible, and Terry Fisher has laid out the basics in a scheme that could be made entirely workable (not perfect) with recent advances in hashcoding identification like 411-song or Shazaam.

The desperate desire of publishers, record companies, and their ilk to keep rents they have come to enjoy, and to make us treat non-rival goods like a ton of coal or an oil painting even though they are nothing like those things, is not only impoverishing all of us in the ways McArdle worries about, but in combination with the use controls technology provides, doing a lot more, and more serious damage. What libertarians could usefully get exercised about in this area is the assaults on individual freedom that outrage Netanel and Lessig, not a bunch of kids who intuitively understand marginal cost pricing downloading their music.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

24 thoughts on “Handwringing is actually different from knowing something”

  1. I'm not that troubled by the changes in the music industry caused by digital technology, which has shrunken the marginal cost of a digital copy to zero. Music survived and thrived in an era when no copies were being made and copyright was non-existent, and it will survive in the new era.

    That said, it won't be easy, especially for up-and-coming musicians, in this hypothetical world where it's no longer profitable to sell recordings. Recorded music would basically have to become a combination of advertising and loss-leader for bands to lure people to their concerts and get them to buy concessions/merchandise.* There's also the possibility of leasing music to television/film companies to use in their shows/movies, and possibly patrons who will outright buy commissioned work. Hell, I could see subsidized/non-profit concert series springing up, just like how a lot of cities have subsidized orchestras and theaters.

    It'd be interesting to see how the various venues for live bands (bars, clubs, etc) would work in the new system. If you weren't a famous musician or band, capable of having large-venue concerts, selling merchandise, or the like, you'd probably have to pin your hopes on regular gigs at various clubs.

    I'm more concerned about the effects this has on movies, which represent significantly higher investments in money and time. Losing DVD sales would be a big blow, but not one that would effectively destroy them – their biggest money-makers usually pull in lots of money from a combination of theater ticket sales, dvds, merchandise, video-games, and sale of movies to tv channels and other programs. It would, however, result in a lot of pressure on studios to produce the type of movies that can draw in tons of theater viewers, and sell lots of said "back end" listed above. That's good for action/sci-fi/fantasy movies, but not so good for independent and other films. Particularly since this type of business environment would result in the studios constantly pressing for a bigger share of the ticket revenue, and theater-owners (who already usually lose money if you only count ticket sales) favoring the movies that bring in lots of teenage popcorn-eaters.

    * Matt Yglesias had some big discussions on this over at his blog. I remember one commenter brought up an interview with the band Rush, where they talked about how back in the 1970s and 1980s, the only thing they made any money on was t-shirt sales. They got next to nothing from the records sold, and the tickets sold just about covered the cost of touring. In other words, everything they did – their recordings, their music, their performances – was basically a loss-leader for t-shirt sales.

  2. Doesn't Britain already pay authors (albeit not much) based on how often the books they write are checked out at the library? It is possible to blend government power with the verdict of the market.

  3. Most of the best music is from people just wanting to look cook and get laid. People who are scrubbing out power plants are the ones who should get paid for the 'work' they do.

  4. Hi Brett,

    You're pretty well spot on in your analysis other than the way you write like you're describing some sort of future state or hypothetical. That's always been reality for somewhere on the high side of 99% of Working Musicians. The number of artists whose records make it onto radio or movie themes is only a relevant fraction in terms of money.

    What we're seeing now is the de-corporatization/-capitalization of music as the barriers to entry, mainly production & distribution costs, have fallen to the point where anyone with talent, time and a laptop can create, publish and promote music (or any other digital good). The fact that the middle-men and venture capitalists don't like being made irrelevant is to be expected. I don't know what will come next any more than the other readers and commenters here, but I do know that it can't happen until we stop propping up the old business models with increasingly ludicrous and expensive punishment schemes.

  5. While I sympathize with the overall point of this post – which is that Megan McArdle is an idiot – you're pretty much dead wrong on this. If someone took the chemical formula for the newest Pfizer drug and put it on a website, along with instruction on how to bake it in your kitchen with household items…that would be illegal. It doesn't matter that it costs nothing to download it. It is still illegal. This is the part you are missing. Downloading without paying is theft of intellectual property. I don't care how much it "doesn't feel like stealing". Some people think savagely beating homeless people is fun because hobos aren't real people. That doesn't change the fact that it is against the law.

  6. When doing something illegal doesn't feel wrong, it may be that the perp doesn't understand the situation or is a moral cripple. But it may also be that the law is a bad law, like the one that can put you in prison in Thailand for criticizing the king. It was illegal for a black person to marry a white one in many states not that long ago, but that didn't make it wrong, as we finally figured out. Downloading without paying under current rules is stealing legally, but shouldn't be. The current rules are bad because they make something good (free sharing of information at zero price) illegal. They aren't bad enough in my view to justify civil disobedience against them, but they need to be fixed (not to mention that artists aren't getting a fair shake now; in addition to being bad for consumers, they're bad for creators).

  7. Long time, no see, Benny Lava. Looks like this debate will be on conditioned ground, then.

    It doesn’t matter that it costs nothing to download it. It is still illegal.

    That's a red herring. At no point does O'Hare say digital downloading and file-sharing isn't illegal under current laws. He's scoffing at McArdle's pessimism about the future of music and other media in an era where copyright enforcement is weak by pointing out alternative payment schemes, and by pointing out that "theft" in the sense of file-sharing feels different from "theft" as in stealing someone's car, because it is when you strip away the legalese (hence his point about it being "non-rival").

    In any case, it all comes back to what we argued about on Yglesias' blog a couple months back. The copyright system is on a rotten foundation for music because it is based on the idea that you can enforce "rent" on the production of additional copies of music beyond the first recording (which is very, very different from normal property rights), and the proliferation of digital recording and file-sharing technology has both made that nearly unenforceable and driven the Marginal Cost of producing each additional copy of music down to effectively zero.

  8. She has more formal economics training than I have (an actual MBA) and beats me on credentials right off the bat.

    You are being far too deferential to McCardle here. An MBA does not involve significant training in economics; the Booth school (where McCardle got her MBA) requires one quarter of micro, and no more. It would be risible if someone with merely a BA in the subject referred to themselves as an economist, and she has substantially less claim to the title than that (her undergraduate degree is in English). Put otherwise: If she qualifies as an economist, then more than half of each graduating class at Harvard does as well in virtue of having taken Ec 10.

  9. Well Brett, I will concede the point for now. O'Hare indeed did not say that it wasn't illegal. I just sometimes get a bit philosophical on the subject of copyright laws and intellectual property in general.

    I know this is unrelated, but Scotty Fitzgerald, F. Scott's only child, is dead. But the royalties for The Great Gatsby will continue to go to her children for some time. Perhaps we need to critically examine the issues of intellectual property. If everyone downloads Bruce Springsteen's albums, doesn't that mean he doesn't get paid for his intellectual property?

  10. Interesting post, makes me think Butters from South Park is a little more clued into everything than Trey Parker and Matt Stone seem to want us to think.

  11. Very interesting. And I'm thrilled to find myself in almost complete agreement with Brett on this.

    I think one could even go further, and say that the extant market structure, to the extent that it has emphasized music as commodity over music as art, has until recently been one that has actively promoted musical stagnation and blatant pandering. What the solution to this might be is anyone's guess. I'm just pointing out that structural forces have often stood in the way of progress.

    But this is getting pretty philosophical (i.e., not rooted in hard science). Yet nowhere near as much so as copyright law itself. Benny's point on illegality is illustrative of the precarious dance one must do to keep first principles on the matter from shattering. At its core copyright law is about maintaining a balance between private and public good. But how you take that model and force it around a vast number of diverse and complicated situations is a constant struggle. It will never be as simple as saying this or that "is illegal". This is just one of those areas of law where we have to be adults and hold many competing considerations in our heads at once. There may indeed be some perfect answer, but we will likely never be able to do better than make an educated guess.

  12. And I suppose this might be a perfect time to entertain you all with a couple of tracks from my best-selling home-recorded rap album, Chicken and Donuts. Introducing: Brim Venereal.

  13. Downloading will not be the end of music, be it popular music, art music, or (c)rap. Choirs will go on singing, and bands and orchestras will go on playing. If downloading hastens the end of the over-engineered, over-produced art music I'll applaud.

    What it will be the end of is The Record Label. And to that, I say good riddance to bad rubbish. Record labels have controlled what is conveniently available to listen to for far too long. They've controlled it by controlling the production and distribution channels. When recordings were distributed in analog form on vinyl, production was very capital intensive. Artists (the occasional McCartney, Simon, and Owens aside) couldn't afford the studios required to record, and none could afford the production facilities.

    The result was that most artists were screwed out of the proceeds of their IP, like Rush. If you didn't hit it big, the sales never made it past the threshold to get you royalty payments. Hollywood had nothing on the record companies when it came to creative accounting, by the way.

    It's not that way any more, and the record labels are very unhappy about the loss of their venal business model.

  14. Publishing companies and record companies are skimmers and extortionists.

    "Sign with us and we will market you and you might make a little money if we make a bunch. Don't sign and you can just keep your day job. But you'll owe us if we lose money."

    Most musicians are so disenfranchised, so bloody poor, that they have no bargaining power even with club owners and play for free or for very little, even when they fill clubs.

    The only way to make a living is to be bought off. So every musician is "looking for a break"– which means getting a small piece of the much bigger action that the skimmers and extortionists will get if the music is succesfully marketed.

    This is the model people want to save?

    Oh, and here's my song: myspace.com/clarkhayne. Comments welcome!

  15. Note the extraordinary rhetorical victories of IP owners in making violations of their state-created property rights not only criminal rather than civil wrongs, but described as "piracy": the paradigm case of which is a violent organised crime on the high seas, involving at the minimum armed robbery and often kidnapping, extortion and murder. In truth, IP violation is a bit less less serious morally than trespass, squatting, failure to pay the rent, speeding, and similar undesirable incidents of non-violent daily corner-cutting.

  16. The basic statistics in this area are open to considerable question too. It has been persuasively argued that the reason that revenues from CDs to the record companies are down is that they are mainly distributed these days through discount sellers like Walmart, at $10 a disk, rather than at specialty music stores at $20. I have seen lately that people who download also spend more on bought music than those who do not. Downloading is a taster not a complete substitute.

    Of course the record labels dispute the figures, but there are at least arguments.

    BTW Canada and Australia also have a public lending right, i.e. a taxpayer-funded grant to authors whose books are borrowed. (No reason it should not apply to borrowed music media too, and maybe it does.) Levies on blank recording media payable to artists are another way to fund creators, and it has been argued (and accepted by at least one Canadian court) that the existence of the levies means that the copying is not illegal.

  17. Looking at it the other way, it's not clear that downloaded music is actually a nonrival good. Sure, another downloaded copy doesn't take away the copies that are already there, but it reduces their value — both social and monetary — as surely a a chicken processing plant in the middle of a tony suburb would reduce property values without physically taking away anyone's house. This understanding about nominally non-rival goods is one of the things that caused the US to put what is now called intellectual-property protection in the constitution in the first place: someone else knowing your industrial process or having a copy of the plates for your book doesn't take away your possession, but it sure makes it less valuable. If you use the narrow definition of nonrival goods, pretty much all copyright, patent and trademark law goes by the board. You can argue that the government shouldn't be intervening to distort the market, but heck, that's what governments do.

    So instead it seems to me we still have to take aim at the other side of the constitutional formulation, which is about promoting the useful arts and sciences. And there it's clear that a system whereby a few oligopolists legally control most of the end-user market for so-called intellectual property and use their distributional stranglehold to extort unconscionable terms from the actual creators is unsustainable in fields where the cost of creating a work is relatively low.

  18. Looking at it the other way, it’s not clear that downloaded music is actually a nonrival good. Sure, another downloaded copy doesn’t take away the copies that are already there, but it reduces their value — both social and monetary — as surely a a chicken processing plant in the middle of a tony suburb would reduce property values without physically taking away anyone’s house.

    That's a drop in pricing due to greater supply, not a lack of "non-rivalry". If I was selling 1000 widgets a year for $50 each, and some guy came along and sold 10,000 for $5 each, that reduces the individual value of my widgets.

    If you use the narrow definition of nonrival goods, pretty much all copyright, patent and trademark law goes by the board.

    Of course. All copyrights, patents, and trademarks are non-rival, by definition (if I produce a copy of your tractor, or your music, you technically haven't lost anything in the absence of government-enforced rent). They're just the right to charge rent and limit the ability to produce new copies of something.

  19. Thanks for your original post, Michael. IMO, this has been one of the better recent discussions on RBC. Congrats!

  20. "That’s a drop in pricing due to greater supply, not a lack of “non-rivalry”. If I was selling 1000 widgets a year for $50 each, and some guy came along and sold 10,000 for $5 each, that reduces the individual value of my widgets."

    But that's not necessarily how the demand curve for "intellectual property" works. If part of the value of the widget (either practically or socially) is that it is part of a controlled universe of widgets, then even one extra widget, sold for a million dollars will render all the thousand-dollar widgets worthless.

    And my point about patents, copyrights and trademarks is that (I think) O'Hare is not willing to toss that entire structure out the window right this minute, even though the non-rival-goods logic would seem to demand that as much as it does the ditching of current rules about compensating artists.

  21. And my point about patents, copyrights and trademarks is that (I think) O’Hare is not willing to toss that entire structure out the window right this minute, even though the non-rival-goods logic would seem to demand that as much as it does the ditching of current rules about compensating artists.

    Just because a good is "non-rival" doesn't mean that you have to allow unrestricted free duplication. O'Hare's point is probably more that you don't necessarily need the current system to promote the creation of non-rival goods – there are alternative arrangements.

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